Following a disappointing Q3 RealD has revealed that it has appointed investment banker Moelis & Co. to “explore a full range of strategic alternatives available to the Company”, which as Bloomberg notes is “language that typically means a company is seeking a buyer.” So why is RealD for sale (or is it really?), who would want to buy it and what would be the reason for wanting to acquire it?
The ‘For Sale’ sign was so prominent in the earnings conference call (transcript by Seeking Alpha) that it was effectively posted before the figures for the quarter were even mentioned:
We will be looking at the full spectrum of options available to us, including but not limited to mergers, divestitures, return of capital alternatives and a potential sale of the Company. Our previously announced review of R&D initiatives will be a part of this broader strategic review.
Cynics would say that RealD had every reason to draw attention away from the poor figures of the most recent quarter.
Revenue in Q3 dropped to USD $32.6 million compared to USD $55.4 million for the same period a year before, a decline of almost 41%. At the same time losses increased to USD $11.3 million compared to a loss of just USD $271,000 for Q3 a year earlier. Despite this the share price jumped over 10% and one analyst upgraded the stock to “Outperform”.
In the previous quarterly earnings call (transcript by Seeking Alpha), CEO Michael Lewis had already outlined previous steps to “enhance shareholder value”:
Moving beyond our quarterly performance. Over the past year, we have evaluated all aspects of our business and are taking additional steps designed to enhance shareholder value. In consultation with our outside advisors, we’re actively evaluating alternatives for restructuring our R&D efforts, Consumer; Laser; Screen and TrueImage. In doing so we have three primary goals, to minimize future capital outlays and expenses associated with our R&D efforts with an expectation of significantly reducing OpEx and CapEx in fiscal year ‘16; to partner with outside third parties to speed the path to commercialization; and to maximize our future economic participation.
It seems that these efforts of “streamlining” the company and finding “additional efficiencies” have not succeeded or been enough. So what is behind the drop and what would be the rational for a sale?
Part of the decrease is purely film-slate related. The same quarter in 2013 was strong with “Frozen”, “Gravity” and “Thor 2″, while this year’s “Hobbit 3″ was not strong enough and “Interstellar” was only released in 2D. But there were deeper underlying problems, as hinted at by CFO Drew Skarupe:
Product and other revenues decreased 41% from the prior-year quarter and represented approximately 36% of total revenues. The decrease was primarily related to decreased purchases from international exhibitors and the overall decrease in our box office performance over the prior-year period. Domestic product revenues represented 55% of total product revenues, and international product revenues represented 45% of total product revenues. Licensing gross profit was $9.5 million or 45% gross margin versus 68% gross margin reported in the prior-year quarter.
So is RealD merely ‘pulling a Regal’? Last year Regal stated that it was looking at possible buyers, after two quarters of disappointing figures. In the end the largest exhibitor in the US decided that it was not for sale and took themselves off the market. But whether it was serious or not in the first place, the company’s announcement gave several media outlets (us included) something other to talk about than the soft box office.